Citigroup’s principal-protected notes linked to Euro Stoxx 50 target conservative investors

By Emma Trincal

New York, Nov. 5 – Citigroup Inc.’s 0% market-linked notes due Nov. 25, 2022 linked to the Euro Stoxx 50 index offer full downside protection against market risk, but investors have to commit to a seven-year holding period and give up return enhancement, advisers said. The cap, however, appears fair, they noted.

The payout at maturity will be par plus any index gain, up to a maximum return of at least 100% with the exact level to be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

If the index falls, the payout will be par.

No free lunch

“They give you the long-only exposure on the upside with full protection on the downside. There’s a 100% cap, but who’s going to be concerned with that? It’s 15% a year,” said Steve Doucette, financial adviser at Proctor Financial.

“You still have to pay for that protection. You pay by getting into a long-term note and you’re also giving up the leverage.

“There’s a cost. And the question is, are you paying too much for that?

“It’s a seven-year note, point to point. What are the odds the index is going to be down in seven years? Pretty slim. How critical is the full principal protection? I don’t know. ...

“Even if we head into a bear market pullback, barring some unforeseen financial crisis or world crisis, it’s pretty unlikely you’re going to be down seven years from now.

“It sounds like it’s a good note for a very conservative investor, someone who doesn’t want to hear that they’re going to lose money. And they can earn up to 15% a year.”

Tax treatment

Doucette added that one of his main concerns with fully principal-protected notes is how the notes are taxed.

“They’re fully taxable as ordinary income. I suppose you can use them in a non-taxable account. I’m still not crazy about it.”

Aside from the taxes, Doucette said he would attempt to reprice the notes in order to pay less for the protection or to enhance the upside.

“The cap is not much of an issue. But if the odds of needing the protection are slim, I may want to pay less for it,” he said.

“I’d be willing to give up some of the protection and see how much leverage I am going to get. That would be the trade-off. I could look into lowering the protection from 1% to 10%.

“But if I end up with the same tax treatment, I may not want to go that route.”

Fair trade-off

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said the structure of the product is different from what he usually looks for but that he likes it anyhow.

“On the surface I’m generally opposed to deals with this length of time. But in this particular case, I do like Europe.

“In addition, I’m generally opposed to a cap on the upside. But this cap in conjunction with the principal protection seems to be a very fair trade-off,” he said.

“I think 100% for seven years is high enough.

“There is always the potential for the underlying to outperform, but the nice part about this note is that you have the downside protection.”

The long tenor is perhaps the real question mark, he said.

“Generally I don’t like to lock in for seven years, so whether I choose to go that long is going to be part of my allocation decision.

“If I have an 18-month view on the Euro Stoxx, I may buy an underweight position in the note and an overweight position in the ETF.

“It will depend on what my outlook is for this particular asset class.”

Citigroup Global Markets Inc. is the agent.

The notes (Cusip: 17298C4A3) are expected to price on Nov. 24 and settle three business days after pricing.

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